Invoice Finance vs Overdrafts

Before business owners expand their horizons into areas of non-traditional lending, they often want to compare the pros and cons of new techniques against traditional methods of financing. One of the fastest growing varieties of new lending is invoice financing, which is compared here with that most traditional of arrangements, the bank overdraft.

The advantages of an overdraft are well known. Such arrangements are usually flexible within the limit provided by the bank, meaning that the lender leaves your business alone to manage its own finances. Very little work is required on your part after setting up the overdraft deal, as long as you remain within the agreed parameters. Crucially, an overdraft is often available relatively cheaply, particularly when compared with more exotic methods of financing. As long as you keep an eye on the small print and do not incur excess charges, an overdraft is an extremely manageable form of short-term financing.

The disadvantages of an overdraft, however, are equally well known. For a start, in the current economic climate they are not easy to obtain, and rely on the historical financial health of your business. Most overdrafts are also repayable on demand from the bank, and can be reduced or eliminated without significant warning. Companies also find it difficult to arrange an overdraft which grows with their business, meaning that when larger amounts of finance are required, an entirely new deal (complete with arrangement fees) must be negotiated.

Invoice financing enables businesses to evade some of these issues. As long as there is an existing invoice book on which to base the deal, the historical balance sheet of the business does not matter. In addition, any deal can be arranged so that it grows with revenues, rather than only allowing a fixed amount of lending. Given the recent credit crunch, it is also often the case that invoice financing releases more cash than the overdraft arrangements which banks are willing currently to provide, and that invoice finance is easier to procure in the first place.

In common with any other lending arrangement, however, invoice financing has its own drawbacks. For a start, the base level of cost associated with such deals is often higher than that associated with a bank overdraft. For each receipt collected, the business will typically be losing the rights to 10-15% of the invoice’s value. What is more, set up fees can often be high, as can the charges for invoices which prove to be uncollectable. In some varieties of invoice finance, businesses also face the reality of another organisation collecting invoices, which can lead to confusion from customers and, if dealing with a disreputable collection agency, a reduction in repeat business.

As with all business decisions, the ultimate suitability of an overdraft or invoice financing depends on the commercial state of your company, and the purpose for which you require additional cash. Whatever deal you choose, make sure to scrutinise the fine print and compare the rates of return you are offered carefully.

We can offer you financial solutions to help keep your cashflow healthy. Request a quote now to find out how much invoice finance can save you.

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